Three Types of Buyers in an Acquisition
There are generally three types of buyers in an acquisition. You want to understand what these buyers are looking for to understand pitch, raise, ask, and counters in negotiation proceedings.
These are three relative experiences you will have with buyers.
- Inexperienced Buyer – This is a buyer that generally has $X to spend and is looking for $Y every month or year. They are looking at the numbers of what they have available to spend and they are analyzing how much they will get in return over time. They are probably savvy when it comes to their business and certain industries, to have the cash for a deal, but they are inexperienced when it comes to an acquisition and that will be a positive for you if they actually have the cash because they are not going to over-analyze everything. They will see the acquisition for what it generally is – an opportunity to take over someone’s hard work and experience deferred cash flow as opposed to lump sum money sitting in the bank. This will be typically the person who will look for a deal and in negotiations you want to make sure you are protected from a deal with the cash to close and the. However, sometimes these first time or second time acquirers are the best fits for your sale because they are the most flexible to get a deal done. It also can be a positive experience for both of you doing a deal as a first time seller or buyer. Most small business acquisitions that are good fits for both sides fall in to this camp assuming training and transition can be relatively smooth.
- Experienced Buyer Looking at a Multiple of EBITDA – They are strictly analyzing your company based on what you did EBITDA relative to revenues and are looking at how sustainable this will be. They will pick apart the numbers in due diligence. The bad news is that if your EBITDA has any discrepancies or questionable numbers this will fall apart in the negotiations for you. The good news though is that they are number oriented and if you have good numbers, they will not deviate too much from the multiple they will provide. This can work in your favor because they will not go below their floor usually if the numbers add up. They just want to be protected from their monthly expenses to keep everything going.
- Experienced Buyer Looking for an Add-On to their Existing Company – These buyers will overpay on a deal because they generally are not just buying cash flow. Therefore, they can afford to not look so hard at the numbers and they can focus on intangible assets that the buyers above are not going to value properly many times. These types of deals are pretty rare to come by and when they do it is generally in the $10m-$100m and up range. These are companies who will overpay for customers, marketing, software, IP rights, brick and mortar presence, etc. You want to be a part of these deals if you can, but be aware that it will take a very long time to close and there will be many parties involved to get a deal done like this. In the end, it is worth it if you can vet how serious they are in the beginning.
Based on these 3 types of buyers, you want to adjust your approach.
You want to adjust your asking price, and payment terms (upfront, earnout, etc.) based on the potential buyers you will have interested in the opportunity.